The Smart Money: Fairy tales and tax cuts

Conservative conventional wisdom says that when you lower tax rates, the economy booms. So several states, including Maine, have actually tried to do this, and the results have been less than enthralling.

Three years ago, Maine cut its top income tax rates from 8.5 percent to 7.95 percent, and changed the lowest income tax rate from 2 percent to zero. But what is unknown to most people, unless they find themselves in the working class, is that the two middle income tax brackets — 4.5 percent and 7 percent — were combined for a tax bracket of 6.5 percent. So those making very little aren’t paying income tax at all, those above the top 20 percent are paying less, and some in the lower middle class are paying more.

At the same time, Maine did not restore a 20 percent cut to property tax relief that was available mostly to low and middle income homeowners and renters, many of them seniors. This resulted in a loss of disposable income. Also at the same time, the governor’s office attempted to slash revenue sharing with the towns, which caused property taxes to increase. That was reversed eventually by the Legislature.

Maine’s State Controller’s latest report found — not surprisingly — that income tax revenue through the first 10 months of FY 2014 is $109 million or 8.9 percent lower than it was last year. But those dollars not going to the state aren’t being translated into a booming economy. Maine ranks 43rd among states in jobs recovered since the bottom of the recession, and almost 43,000 Mainers are working part-time who want full-time work. And Maine’s personal income revenues are the lowest in New England.

Last Tuesday, the U.S. Bureau of Economic Analysis released preliminary estimates of state personal income for the first quarter of 2014, along with revised estimates for all four quarters of 2013. Total personal income for Maine grew 0.5 percent in the first quarter of 2014, with net earnings — the largest component of personal income — growing 0.8 percent.

That’s dismal for a theoretically growing economy. While the U.S. has recovered 66 percent of the jobs lost in the recession, Maine has recovered about 40 percent of the jobs lost, according to the Maine Center for Economic Policy. That means despite the Governor’s rosy assessment at the State of the State, we’re down about 15,000 jobs. Maine ranks dead last in both private-sector job creation and total job creation from 2011 to December 2013.

Is all of this related to tax cuts? It’s not that simple. The tax cuts meant that jobs were lost in state government that might not have been lost otherwise — some 4,400 people lost their jobs — and infrastructure and other work that could have and should have been done wasn’t done, and the loss of those jobs, and the jobs that would have supported them across all sectors, left a real sting.

But the corresponding tax increases in property taxes meant that those who really grow the economy — consumers — had a net loss of disposable income, so their spending was curtailed, causing other small businesses to fail. That death spiral continues today.

Maine isn’t alone in this kind of magical thinking. Two years ago, even after seeing the early flop of the Maine experience, Kansas embarked on the same mystery tour, in which it cut income taxes sharply, claiming that it would herald a new era or prosperity. Kansas’ governor, Sam Brownback, predicted that the tax cuts would jump-start an economic boom that would eclipse some of its more prosperous neighbors. “Look out, Texas!” he said.

Of course, Kansas isn’t booming, it’s lagging behind both neighboring states and the nation as a whole — just like Maine. The state’s budget is in debt, and Moody’s has downgraded its debt.

Nearby states that didn’t slash taxes are doing much better. Kansas has added jobs between 2012 and 2014 at the rate of 3.4 percent, but Colorado is up 8.2 percent, Oklahoma is up 5.6 percent, and Iowa is up 4.2 percent. In the most recent report in May, Kansas lost jobs, alone among all its neighboring states.

Brownback is struggling for re-election in a very red state. November will be an interesting time out in the heartland.

The legislation for both sets of tax cuts — and Maine and Kansas are by no means alone — were written by the American Legislative Exchange Council, or ALEC, which is heavily subsidized by Americans for Prosperity, the Koch Brothers’ nonprofit organization.

The supply-side economics mantra, which says that if you plow money into the so-called “job creators” they will take those funds and create jobs for the rest of us just isn’t working, and after giving it a good, solid chance over the last 40 years or so, it’s probably time to call it a day. We know what does work — a highly progressive marginal tax rate — and strong income supports for working class people, linked with meaningful regulations to prevent abuse by banks, commodities markets, and financial services firms.

Now, let’s get back to what works, and leave the fairy tales by the Brothers Koch behind.